What is cryptocurrency?
A cryptocurrency is a digital or virtual asset that is not issued or backed by a central bank or government. Implemented with decentralised control via distributed ledger technology, typically a blockchain, individual coin transactions and ownership records exist in a database secured by strong cryptography. The price is based on supply and demand and can be derived from specific crypto exchanges. Cryptocurrencies are usually traded on crypto exchanges or conversion services such as Currency.com. Since the release of Bitcoin (BTC) in 2009, many other cryptocurrencies, such as Ethereum (ETH), and their variants have been created. There are currently more than 5,000 cryptocurrencies being traded, with Bitcoin remaining the most well known and by far the largest by market capitalisation.
What is leveraged trading?
Leverage (or margin) trading helps to increase purchasing power. For example, the leverage of 1:10 means that for a 1 BTC deposit you can open positions (or “trades”) worth up to 10 BTC. Please note that margin/leveraged trading requires extra caution and understanding of the market and, while large profits can be realised if the price moves in your favour, you risk extensive losses if the price moves against you.
An individual’s maximum leverage size depends on whether the client is categorised as Retail or Professional. For Retail clients, the leverage size is limited to 1:20; for Professional clients, the leverage size is limited to 1:100. When opening a leveraged trading account, Currency.com categorises all clients as Retail by default. However, you may apply to be categorised as a Professional, provided you meet certain criteria. For more information about client categorisation, please refer to our Client Categorisation Policy.
Negative balance protection
When trading cryptocurrency on leverage, it is possible to reach an account deficit state, i.e. a situation when the account balance is negative. For the benefit of our clients, Currency.com has implemented a negative balance protection (NBP) programme, whereby the client cannot lose more funds than they have within their account. The client is nonetheless expected to actively monitor and manage open positions in the account and use available order types, such as stop-loss and guaranteed stop-loss, to minimise the risks (see below). NBP is triggered whenever margin close-out protection cannot be effectively applied due to extreme market events affecting the underlying asset in question. The purpose of NBP is to ensure that a client's maximum losses from trading on leverage, including all related costs, are limited to the total funds in the client’s account.
Collateral is an asset a client uses to open a leveraged trade. Currently, the only cryptocurrencies that can be used as collateral are BTC and ETH. When a client opens a trade with ETH as collateral, it means that the funds from their ETH wallet are used to keep the position open. The client can choose either cryptocurrency as collateral regardless of the market pair they want to trade, e.g. the BTC/USD pair can be traded using an ETH wallet
A market order allows a client to open a buy or sell position at the current price.
A limit order is an instruction to buy or sell an asset at some time in the future at a level that is more favourable than the current market price. Limit orders allow a client to specify the minimum price at which they will sell or the maximum price at which they will buy. Limit orders guarantee price but do not guarantee execution. Limit orders guarantee price but do not guarantee execution. In other words: partial fill is possible.
Here is an example of partial fill: you set a buy limit order on the BTC/USD market pair for buying 2 BTC when the price hits 9,000 USD. Assume that another client uses the exchange and sends a market order for selling 1 BTC and it is matched with the prior set limit order. In such a case the limit order will be partially filled with the executed amount – 1BTC. The remaining amount (1 BTC) will still be in place until there is further demand, until the specified price is reached or until the limit order is cancelled or expired.
Stop orders give traders the opportunity to buy or sell virtual currency at a predetermined price that is less favourable than the current market price. In placing a buy stop order, a level higher than the current market price should be specified; a sell stop order should be set lower than the current market price.
Stop-loss and take-profit
These settings are considered risk-management tools used to manage possible losses or profits in terms of the opened positions. These instructions help clients to limit losses (stop-loss) or fix profits (take-profit) by specifying the price, distance or amount an order is to be closed at. Stop-loss and take-profit levels can be easily adjusted while the position is open. Minimum and maximum distance limits exist on all stop-loss and take-profit orders. In the case of stop-loss, this offers protection against the instant closing of an order with a loss in the event of market volatility, spread increase or execution at the worst price. The distance at which a stop-loss can be set depends on the volatility of the instrument and the spread. Once the price reaches a predetermined level, the order will be automatically closed. Please note that take-profit orders behave like limit orders and can be partially filled.
Guaranteed stop-loss (GSL)
A GSL works in the same way as a standard stop-loss order, except that it guarantees to close a trade at the specified price, regardless of market volatility or gapping. If a guaranteed stop-loss order is executed, the client will be charged an additional fee. The size of the additional fee may vary depending on the instrument being traded, and is indicated in the special interface window (it will appear in the deal ticket as soon as you choose GSL and is called Stop Premium).
Differences between stop-loss and guaranteed stop-loss orders
A guaranteed stop-loss order guarantees the execution of a trade at the price you’ve set, whereas a standard stop-loss order guarantees execution but does not guarantee the price. To better understand the difference, take a look at the following example.
A client buys 1 BTC (BTC/USD market pair) at the price of 10,000 USD with a leverage of 10x. A stop-loss level at 9,000 USD is set (which equates to a 1,000 USD loss).
In the scenario that, at some point, 1 BTC falls to 8,900 USD and a price gap arises, let’s see how the trade will be closed for the two different stop-loss orders after the market opens.
The trade will be closed in accordance with the first available price in the corresponding order book; here we’re assuming it is equal to 8,900 USD.cx. The client will then face a loss of 1,100 USD.cx, instead of the anticipated 1,000 USD.cx.
The trade will be closed at a price of 9,000 USD.cx (even if there is no such price in the order book) and an additional fee will be taken from the client’s account balance. The client will have then made a loss of 1,000 USD.cx plus the additional fee. Please note that fee sizes vary depending on the chosen market pair.
Margin call, close-out and liquidation levels
A margin call warning is a reminder sent to clients when their amount of margin for long and short positions becomes insufficient to maintain current transactions and other orders.
- If your equity falls below 100 per cent of the required margin, you’ll receive the first margin call warning. You will no longer be able to open new trades or place orders.
- If your equity goes below 75 per cent of the required margin, you’ll receive the second margin call warning. You will still not be able to open new trades or place orders.
- If your equity is equal to or less than 50 per cent of the required margin, it means you have reached the minimum margin level allowed, and your trades will be gradually closed out.
Once a client’s equity drops below 50 per cent of the required margin (reserved), the trades will be closed out in the following order:
- Initially, good till cancelled (GTC) orders are closed (limit, buy stop and sell stop orders).
- If the margin level remains below 50 per cent, all losing open trades on the open markets are closed. Please note that even though crypto markets are functioning 24/7 in a general sense on our platform, we have a five-minute pause each day for better spread control and a one-hour maintenance period twice a week.
- If the margin level stays below 50 per cent, the remaining trades on the open markets are closed.
- If the margin level is still below 50 per cent, all the remaining trades are closed as soon as the markets are open.
Wallet values explained
The client wallet section consists of five indicators, each of which has a unique calculation formula:
Funds: the balance available after closing all trades; sum of capital without taking into consideration active leveraged trades’ P&L.
P&L: profit or loss on active leveraged trades.
Equity (= funds + P&L): shows the sum of deposited funds, (un)realised profit or loss, accept prior taken fees and withdrawals.
Reserved: the sum of funds taken as a reserve for market and limit orders in the “leverage” trading mode as well as for the limit orders in the “exchange” trading mode.
Reserved (margin) = current asset price (bid or ask depending on the trade direction) x quantity ÷ leverage size.
Available (= equity - reserved): the sum of money which is currently available for withdrawal.
A final formula is the following: Equity = available + reserved = funds + P&L
Example and calculations
Let’s assume that a client sets a limit order on the BTC/USD market. The client has 2 BTC in their account.
Order details: buy 6 BTC when the price of 1 BTC hits 8,000 USD with the leverage 1:5 (5x) and use BTC as collateral.
Please note that when calculating reserved (margin) for limit orders, a limit-order price should be taken:
Reserved = (limit order price x quantity ÷ leverage) / limit order price.
|Description||Current asset price, USD (1 BTC = x USD)||Available, BTC||Equity, BTC||Funds, BTC||P&L, BTC||Reserved, BTC||Equity ÷ reserved||Comment|
|Prior to any order||9000||2.00||2.00||2.00||0.00||0.00|
|Limit order (buy when the price hits 8000 USD)||9000||0.93||2.00||2.00||0.00||1.20||166.67%|
|The price hits 8000 USD||8000||0.80||2.00||2.00||0.00||1.20||166.67%|
|The price drops by 500 USD||7500||0.40||1.60||2.00||-0.40||1.20||133.33%|
|The price drops by 500 USD||7000||-0.06||1.14||2.00||-0.86||1.20||95.24%||1st margin call (<100%)|
|The price drops by 300 USD||6700||-0.36||0.84||2.00||-1.16||1.20||69.65%||2nd margin call (<75%)|
|The price drops by 215 USD||6485||-0.60||0.60||2.00||-1.40||1.20||49.86%||close out|
|The client doesn't have any conditions for gradual close out||6485||0.60||0.60||0.60||0||0||0.00%|
Please be informed that this is only an example and doesn’t apply to any other trades within the chosen wallet, or to any fees.
Risks related to leveraged trading
Markets do not view cryptocurrencies like standard asset classes, and their returns often cannot be explained with traditional market and macroeconomic factors. The average return and volatility of cryptocurrencies are higher than those of traditional asset classes. Although their risk-return trade-off has been stabilised to some extent (for example, the average Bitcoin weekly return and standard deviation (volatility) has fallen to 0.67 per cent and 9.7 per cent respectively from 1.26 per cent and 10 per cent a year ago), cryptocurrencies are still more risky investments than traditional assets. Their returns still experience high probabilities of “disasters” (negative returns) and “miracles” (positive returns).
Therefore, Currency.com aims to provide its clients with reasonably high leverage so they can benefit from potentially high returns, while giving them effective risk management tools (negative balance protection or guaranteed stop-loss) to limit their losses.
Trading leverage decreases the amount of funds required to perform a trade. Suppose you have 1 BTC in your Currency.com wallet and you want to buy other tokens with a total value of 2 BTC. With 2x leverage you can easily do that: Currency.com will double your money and make it happen.
Traders value leveraged trading as an opportunity to multiply their benefits. On the other hand, risks in leveraged trading are multiplied accordingly with potential profits.
For example, if you invested $1,000 with 5x leverage, you will benefit or lose 5 per cent of the invested amount per 1 per cent price movement. If the price were to drop by 10 per cent, your loss would be 50 per cent of the invested amount ($500).
That’s why it is very important to evaluate the possible risks accurately before entering into a leveraged trade
Every leveraged trade requires a certain margin on your account. When there is insufficient margin, you can’t perform any new leveraged trades until you add more funds to your account or free up margin from current leveraged trades. When the equity on your account becomes insufficient to maintain your leveraged trades, Currency.com begins to close your positions. That means that your pending orders will be cancelled and your current leverage operations will be closed. To avoid this, make sure your equity ÷ margin level is always above 50 per cent.
Please be advised:
- Different markets have their own distinct type of risk.
- Price volatility can be unpredictable, especially when there is significant market or economic news from a huge variety of sources.
- Many city fund managers fail to outperform the market and most ordinary investors face the same challenges and conditions.
Since we offer leveraged trading on cryptocurrency markets, there are risks specifically related to cryptocurrencies and they should also be considered. Please refer to the Cryptocurrency Risk Disclosures page for more information.